Mobile Payments Brighten Cash Flow for Small Business

One of the biggest worries for small-business owners is dealing with fluctuations in cash flow. Nathan Perry's five-year-old New York City catering business has had to operate with up to $30,000 in unpaid customer invoices at any given time, for instance.

Such gaps in cash flow—or so-called "lumpy money"—can make it difficult for business owners to focus on expansion rather than, say, managing payrolls or paying other bills.

ENLARGE

Nathan Perry, at right, who runs the Cutting Edge Elite catering business in New York City, uses a mobile-payment service to expedite payments.
Ramsay de Give for The Wall Street Journal

"When someone tells you the check is in the mail, it doesn't mean anything," adds Mr. Perry, owner of the Cutting Edge Elite in New York, which has five full-time employees and 400 servers and bartenders.

He and many other business owners say they're finding that mobile-payment devices and other technologies are making it easier for him and other business owners to turn sales into working capital overnight. Instead of issuing an invoice after a job, Mr. Perry now has customers pay on the spot, by asking them to use a mobile-payment service. Mr. Perry pays a $35 per month and about 2.5% per transaction for the service.

Until recently, small service companies, from caterers, to plumbers to photographers, had few options beyond billing customers and then waiting for days, or even weeks or months, for a check to arrive in the mail. Typical payment terms range from 30 to 90 days.

Wait No More

No more waiting for a check in the mail. Here are some payment tools that are making it possible for small service firms to quickly turn sales into working capital:

Mobile-card readers: Known as dongles, these devices typically attach to the audio jack of a smartphone, enabling merchants to swipe credit and debit cards from anywhere. Offered by Intuit GoPayment, Square Card Reader, PayPal Here. Fees range from 1.7% (with a monthly flat fee) to 2.75% per transaction.

Electronic invoicing: There's a wide variety of online billing software for small businesses that can help automate invoices, receipts, collections and late notices. Offered by FreshBooks, BillingOrchard, Harvest and others. Services generally run upwards of $15 a month.

Photo-card processing: This iPhone app enables merchants to take a photo of a customer's credit- or debit-card digits and instantly process payments on-the-go. Offered by Flint Mobile Inc. Fees range from 20 cents per transaction, plus 1.95% for debit cards and 2.95% for credit cards.

Business owners traditionally have turned to lines of credit, loans or credit cards for the funds they need to get through a payroll cycle, or to pay landlords and suppliers. Last year, 45% of 1,000 small-business owners cited "not getting paid on time by clients and customers" as the biggest challenge they faced when managing their cash flow, in a survey by Bank of America.BAC-1.38%

But lately, more of these firms are avoiding borrowing or tapping credit lines by turning to services like PaySimple, IntuitINTU0.03% GoPayments, PayPal Here or Square Card Reader—payment applications that come with credit- and debit-card readers for mobile devices. Flint Mobile Inc., a newer service, processes payments by taking photos of cards with an iPhone. Other services take photos of checks.

A primary benefit of these technologies, many business owners say, is that sales are converted into cash inflows, within a day.

For example, assume a business owner sends out a $10,000 invoice with 30-day terms. While waiting for the check to arrive, the business owner has to find some way to cover monthly expenses totaling, say, $5,000. If the client is delinquent and pays a month late, the business owner will have to find a way to pay two months' of bills, or $10,000.

In the same scenario, but with a quick-turnaround payment, the business owner will have $10,000 before bills come due, leaving the company in a more secure cash-flow position. Half the money can be set aside for that month's expenses, while the other half can be used to cover cash shortages in the future or be applied to investments to expand the business, says Tiffany Washington, owner of Washington Accounting Services Inc. in Waldorf, Md.

Denée Carrington, an analyst at Forrester Research, says the number of small service firms using mobile devices to accept payments has "taken off like wildfire" as improved technology and greater convenience are making consumers—and businesses—more comfortable with the idea of paying their bills on smartphones and other devices.

Revenue from Intuit's payment services reached $417 million last year, a 15% increase from 2010, according to a company spokesman. Today it handles more than $37.8 billion in small and midsize business payments every year.

Flint, a Redwood City, Calif.-based startup launched in November, has attracted 40,000 users in just three months, with average transactions of $100. While the application is free, the company charges users 20 cents per transaction, plus another 1.95% of debit cards and 2.95% for credit cards.

Greg Goldfarb, the company's co-founder and chief executive, says small service firms—what he calls "non-countertop businesses"—are a "massively underserved" market for mobile payment providers, which tend to focus on retailers.

PaySimple, a Denver-based payments service that arrived in the marketplace in 2006, now has more than 10,000 small business users, a 50% increase over a year ago, says co-founder Eric Remer.

The growing adoption rates of payment technologies by small-business owners might partially explain why credit demand for working capital from small firms remains stubbornly low, even as their balance sheets and credit-worthiness improve, according to Robb Hilson, head of Bank of America small-business segment. The bottom line: with improved cash flow, many small businesses don't need to borrow to make payroll, he adds. In December, the Bank of America launched its own mobile payment application that is linked directly to small-business owners' checking accounts, with customer payments available within a day.

Scott Henshaw recently started using a credit-card reader that plugs into his smartphone at his family business, Pacific Transportation Technologies LLC, a machine shop in Kirkland, Wash., that makes metal parts for trains and buses.

Mr. Henshaw used to start the 30-day billing process after delivery. But in the past four years, he says, it's become more common for customers to pay in 60 to 90 days. In response, he now asks some customers to pay upon delivery, using PayPal Here on his smartphone, which gives him an inflow of cash "in fractions of a second," he says. He can use it to pay employees and buy supplies.

One downside of the mobile-payments trend for businesses is the increased possibility of fraud. "Criminals have worked out that instead of using a stolen credit or debit card, they can just break into an existing payment account," says Alisdair Faulkner, chief products officer at ThreatMatrix, a San Jose, Calif., online security firm.

Mobile-payment services respond that the added levels of security, required of all registered payment service providers, can make these payments safer than handing a credit or debit card to a waiter.

Four years ago, Bill Effner, the owner of Landes Audio and Video in Chester, N.J., had to write off $2,000 for an unpaid bill for installing a home entertainment center. He now uses Flint to take instant payments on his iPhone.

"When I'm done with a job now, I go to my customer and say 'here's my favorite part' and I get paid right there and then," he says.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.